Global London – The justice play

Having for years eschewed the City disputes market to invest in corporate and banking work, US firms have been piling into litigation of late

In retrospect, it seems strange that it wasn’t part of the game plan from the very start. US law firms – so long geared as much towards disputes as transactional work – came to London in force well over a decade ago… and all but ignored litigation.

There were exceptions. White & Case was an early convert and even indirectly helped to define City regulation when its partner Margaret Cole joined the Financial Services Authority (FSA) in 2005 as director of enforcement; Skadden, Arps, Slate, Meagher & Flom and a handful of peers have long punched their weight.

But in the main, US advisers during the 2000s hardly troubled themselves with disputes. What a difference a banking crisis, the sustained run of tougher global enforcement and the market-disrupting City launch of super boutique Quinn Emanuel Urquhart & Sullivan can make.

As Mayer Brown’s London head Sean Connolly says: ‘Our biggest group in London is litigation, which has had a really good three or four years and represents around 40% of the business.’ Mayer Brown now has 28 partners covering contentious work in the City, a level beyond all but the largest UK rivals.

And Mayer Brown is far from alone in seeing major expansion in its UK disputes offering with many global peers focusing on investigations, regulatory and white-collar criminal work, banking litigation and, more recently, arbitration.

Firms like Cleary Gottlieb Steen & Hamilton, Gibson, Dunn & Crutcher, Sidley Austin, Covington & Burling, Dechert and Debevoise & Plimpton have all been investing heavily. And more are set to come, with two bellwether US litigation brands – Boies, Schiller & Flexner and Jenner & Block – both recently announcing London launch plans.

The appeal is not hard to fathom. While City firms can usually bind their core banking and corporate links within institutional relationship programmes – making it hard for US rivals to prize away large clients – litigation remains a portable business.

But the cultural pitch is even more resonant. City litigators in many cases find US law firms more welcoming, while the increasing influence of US prosecutors and regulators in Europe means the appeal of a transatlantic disputes platform has grown markedly in recent years.

London firms are struggling to retain their stars in the face of such a seductive prospect. There are now well over 500 UK litigators at the offices of foreign law firms, including more than a dozen genuine heavyweights that can compete with the best Freshfields Bruckhaus Deringer or Herbert Smith Freehills (HSF) have to offer. And while transactional activity in the UK has been subdued for five years, London has only buoyed its position as a global litigation hub, benefiting not only from an onslaught of regulatory activity but the popularity of English courts for resolving emerging economy disputes.

Cleary Gottlieb partner Jonathan Kelly, himself one of the most prominent litigators to join a US practice, speaks for many when he remarks: ‘Litigation is part of the DNA of US firms. There’s a natural litigation religion within US firms that spreads out across their international practices.’

Jones Day litigation partner Craig Shuttleworth strikes a similar tone: ‘Culturally US firms are more about disputes than English ones. The litigators aren’t trailing behind the corporate deal-doers and our aim is to handle disputes for our clients around the world.’

Getting in the game

The days in which City litigation practices were limited to broad-service players like Baker & McKenzie or White & Case on one hand, or firms like Bingham McCutchen with a specific contentious slant to their core practice on the other, have certainly passed.

A host of US-based firms boast UK litigation and contentious teams of more than 30 lawyers. Among them are Mayer Brown, Debevoise, Baker & McKenzie, White & Case, Jones Day, and Skadden Arps (see box, ‘US firms in London’). Other firms to have amassed substantial UK practices include Gibson, Dunn & Crutcher, Dechert, Quinn Emanuel, Cleary Gottlieb, Sidley Austin and Fried, Frank, Harris, Shriver & Jacobson.

Recent years have seen Cleary Gottlieb make several high-profile appointments, including Kelly from Simmons & Simmons in 2010 and, two years later former Stephenson Harwood chief executive Sunil Gadhia. Elsewhere, Dechert’s dramatic recent expansion in London has been driven as much by a series of appointments in the disputes and regulatory fields, including in 2011 DLA Piper’s joint global head of litigation Neil Gerrard and EMEA head of corporate crime and investigations Jonathan Pickworth. The move was followed up in early 2012 after it hired Norton Rose’s former global head of disputes Antony Dutton.

Also significant were appointments like that in 2011 of Kingsley Napley’s Stephen Pollard by Wilmer Cutler Pickering Hale and Dorr (WilmerHale), only the most prominent in a series of hires in the white-collar crime space by US advisers in London, including Skadden, Willkie Farr & Gallagher and Sullivan & Cromwell.

One notable precursor to this run of post-Lehman growth was Debevoise’s 2007 recruitment of former UK Attorney General Lord Peter Goldsmith QC to lead its European litigation practice. Debevoise is a particularly interesting case having worked in the mid-2000s on a ground-breaking and hugely complex investigation into allegations of bribery at German group Siemens. The mandate – which was reputed to have earned Debevoise more than £75m – acted as an early signal of the shift in Europe towards US-driven corporate investigations and provided US advisers with a lucrative and familiar market to pursue in the old world.

Gibson Dunn echoed the Goldsmith appointment – a familiar tactic to US advisers well practised in the art of recruiting high-profile litigators from the public sector – with the appointment of former Lord Chancellor and secretary of state for justice Lord Charles Falconer QC in the summer of 2008 as the banking crisis was just about to reach a crescendo.

The approach of Gibson Dunn and Debevoise also speaks to another advantage of US advisers. Coming from a fused profession where lawyers handle cases through to advocacy, US firms have some affinity when recruiting senior barristers. Likewise, the more individualistic culture of US firms has some resemblance to barrister chambers. Cut from a similar cloth is the New York-based advocacy boutique Kobre & Kim, which has hired several silks at its London arm and has 16 English-qualified lawyers.

Goldsmith argues this approach gives Debevoise a distinctive sell: ‘We run from first base to trial – no stop and start. This is what is different about us. We run the whole case right the way up to the Supreme Court. Some lawyers would not be comfortable working on our model – we don’t lay off our difficult issues to barristers and chambers but solve them ourselves. We find this more satisfying but it’s not for everybody.’

Jumping the fence can involve a culture shock for UK lawyers due to the pronounced differences in how cases are run in the US. As Kelly recalls: ‘US firms can look at cases in a different way to UK firms. Many UK firms naturally start with the English courts, but US firms will also often take a more top-down approach and will contemplate a whole range of different dispute resolution methods.’ But the consensus view is this is more than offset by feeling that disputes are core to US partnerships.

Also significant in terms of selling the UK disputes market to US advisers was the Quinn effect, reflecting the dramatic growth and profitability in London of Quinn Emanuel following its 2008 City launch. While many US advisers have come to London with unfulfilled expansion promises, Quinn Emanuel proved an exception by securing a run of big-ticket mandates after creating a launch team armed with former Kirkland & Ellis litigator Richard East and a brash approach to litigation unencumbered by the infrastructure or conflicts of a traditional City player.

By the end of the 2012 financial year, Quinn Emanuel had achieved revenues of £27.5m in four and half years, with profits of £18.6m, an unprecedented achievement in terms of turning a greenfield launch into a profitable business.

‘I’d love to say that Quinn hasn’t had an effect, but it has,’ wryly observes Shuttleworth at Jones Day. ‘There’s no doubt that when you pitch for a job Quinn appears an annoying number of times.’

Firms like Quinn Emanuel have also ushered in a more creative mood on fees that has appealed to some clients; a contrast to UK firms’ resistance to contingency fees in big-ticket litigation.

The leading role of Skadden Arps for Roman Abramovich in the epic legal dispute with Boris Berezovsky – alongside roles for US peers in several other comparable oligarch disputes that have dominated the London courts in recent years – only underlined the huge strides global firms have made in UK litigation.

Setting the board

The last two years have shown no let up in the pace of expansion. Covington & Burling recruited two disputes partners from CMS Cameron McKenna in July 2013 as it continues its rapid recent growth in London. Partners Ben Holland and Jeremy Wilson both joined Covington’s arbitration and litigation practice to focus on energy-related disputes.

In addition, exits from Herbert Smith Freehills saw a string of partners move to US firms, including litigator Kevin Lloyd, who joined Debevoise, and European head of litigation and employment group head in Moscow, Dmitry Kurochkin, who joined Dechert. Latham & Watkins, likewise, recruited HSF partner Simon Bushell in 2013, who specialises in fraud and had carved out a lucrative niche working on Russia-related disputes, while Quinn Emanuel last year hired commercial litigation grandee Ted Greeno. Quinn Emanuel had previously rattled Allen & Overy (A&O) in 2012 with the recruitment of the firm’s head of international arbitration Stephen Jagusch and partner Anthony Sinclair.

Such has been the demand for good litigators that US firms have on occasion recruited from each other, with Sidley Austin last year hiring Weil, Gotshal & Manges litigation partner Matthew Shankland, while Jones Day recruited Baiju Vasani from Crowell & Moring in 2012. Other significant moves in 2013 included Mayer Brown’s hire of White & Case’s Alistair Graham, one of the first senior litigators to make a mark at a US-bred firm, and Reed Smith’s hire of Lawrence Graham partner Eoin O’Shea.

Even a conservative player like Debevoise is investing substantial resources, taking on 12 UK lawyers during 2013 and six so far in 2014.

Ben Holland at Covington comments: ‘Many established US firms have a reputation as being tight, sharp and more forceful in handling disputes. These US firms take advantage of this reputation and continue this approach in the UK. That is why firms with strong US disputes practices are attractive in London.’

Other litigation boutiques to launch in the City include Boies Schiller, which recently hired Bingham McCutchen partner Natasha Harrison to head the firm’s first international foray (see box, ‘A little bit of stardust’, opposite). Similarly, Chicago-headquartered dispute leader Jenner & Block is also planning to set up a City arm later this year – its first overseas base. Of the US litigation elite only Paul, Weiss, Rifkind, Wharton & Garrison; Cravath, Swaine & Moore; and Simpson Thacher & Bartlett have resisted a substantive move into the UK disputes market, while Kirkland & Ellis has only made modest investments.

‘You can’t ignore it’

Despite the continuous level of recruitment, the sustained push into contentious work bears little resemblance to the scattergun hiring that marked US firms’ initial push into London. The current wave is tightly concentrated in a handful of areas and the top investment priority is white-collar crime and investigations work, including related fields in financial service regulation and banking/securities disputes.

The former has, of course, been driven by the global regulatory push on financial institutions and the rise of litigation linked to the fallout of the banking crisis. Likewise, the rapid ‘Americanisation’ of Europe’s disputes and regulatory environment and approach to pursuing corporate wrongdoing has been startling; a trend evident well before the credit crunch was super-charged in the post-Lehman business world.

Mayer Brown litigator Alistair Graham says: ‘These cases are part of an ongoing trend and reflect the wave of financial litigation now going to trial from the financial crisis. We are now seeing an uptick in this type of work coming to trial.’

The number of forces in this area makes a compelling investment case for even the most conservative US players. For one, the 2010 Bribery Act has become a defining moment in shifting the UK towards a more rigorous compliance and anti-fraud culture, whose cultural impact has been felt far beyond a narrow bribery context.

All this has, of course, been amplified by a sustained run of aggressive enforcement from the US Department of Justice (DoJ) and the Securities and Exchange Commission (SEC). Already under huge pressure, evidence of widespread rigging of the institutional interest rate Libor in 2012 has had a huge impact, sending global litigation spending by major banks rocketing over the last two years.

Evidence of payment protection insurance (PPI) mis-selling extended the problems to the UK retail banking sector, while current claims of manipulation of the gigantic forex market – which dwarfs Libor-based trading and of which London is the dominant global hub – promises to open a huge new front.

Legal Business’ research conducted in November based on responses from more than 200 counsel at major banks found that 84% had seen an increase in litigation spending over the last five years. Research from data firm SNL Financial concluded the six largest US banks had already spent $63bn in settlements related to the financial crisis and scandals, a figure likely to break $100bn.

The level of exposure facing banks, of course, underlines the extent to which US authorities – famed for their aggressive and relatively well funded approach to enforcement – are driving the market. In short, established US advisers are viewed as having a seductively strong platform to attract talented white-collar and banking litigators in London.

And this activity has been matched by a far tougher line from UK regulators with the FSA dramatically stepping up its level of sanctions. Having historically awarded small fines to regulated institutions, FSA fines surged to £66.14m in 2011 before rocketing in 2012 to £311.6m, in the wake of Libor-related investigations (including the record £160m fine for misconduct related to Libor and Euribor levied on UBS). The transitional year of 2013, in which the successor body the Financial Conduct Authority (FCA) was born, saw such sanctions drop dramatically, but fines have already hit £73.2m in 2014.

Matthew Shankland at Sidley Austin articulates a familiar theme: ‘Many bank GCs already have far greater provision for contentious regulatory investigations in their budgets than they do for litigation. They expect to have to commit their resources to regulatory and compliance issues because the trend is towards a more highly regulated market. The challenge for the Magic Circle is that most of the aggressive regulatory actions begin in the US and spread out across the world – if there is a big investigation in the states, other regulators can’t easily ignore it.’

Disputes partner Joanna Ludlam at Baker & McKenzie echoes the point: ‘Since the UK Bribery Act came into force, the world has been waiting to see how the Serious Fraud Office (SFO) is going to exercise its very broad extra-territorial jurisdiction, but not a great deal has happened so far. Perhaps because the SFO is far less-well resourced than the DoJ.’

With the UK this year introducing deferred prosecution agreements – a version of the corporate plea bargaining that is fundamental to the US school of enforcement – that trend looks set to develop for years to come.

Ludlem adds: ‘We can of course expect an increase in prosecutorial activity at some point and in the meantime we can look at the DoJ’s enforcement trends to anticipate the way the SFO might deal with certain issues.’

Dechert partner Andrew Hearn says: ‘US firms are particularly strong at dealing with financial disputes and investor claims, especially given the propensity in the US for shareholder class action or activism. We have a lot of hedge fund clients who are activists and some of the things we do for them in the US translate to the UK.’

Goldsmith makes the broader point that US advisers have an advantage in having long viewed white-collar crime work as a core element of their business, while top City rivals until recently left such work to London’s fraud boutiques, like Peters & Peters. ‘You are now seeing the big UK firms try to build more depth in crime; it’s an area they have traditionally focused less on,’ asserts Goldsmith, arguing that boutique disputes firms are now stronger competition than the Magic Circle in this context.

Libor claims have of course been a major factor, with most of Wall Street’s leading law firms having already advised US settlements for major banks, including Sullivan & Cromwell (for Barclays); Simpson Thacher (for J.P. Morgan); Paul Weiss (for Deutsche Bank); Davis Polk & Wardwell (for Bank of America Merrill Lynch); and Shearman & Sterling (for Credit Suisse). In addition, Gibson Dunn’s City arm last year advised on a €1.7bn Libor settlement agreed with European Commission antitrust regulators covering eight major banks. The settlement, which was finalised in December 2013, saw Gibson Dunn’s Philip Rocher advise UBS, while Cleary Gottlieb’s Brussels partner Robbert Snelders advised Citigroup.

The related area of banking litigation is obviously lucrative for US advisers. Mayer Brown, for example, advised UBS when it sued German water company Kommunale Wasserwerke Leipzig (KWL) for approximately $600m in relation to synthetic collateralised debt obligations (CDO) and credit swaps that defaulted during the financial crisis in 2008. The case is set to hit the commercial court this month and will last between 65 and 75 days. Mayer Brown disputes head Ian McDonald is leading the case, instructing Gibson Dunn’s Falconer, while Addleshaw Goddard and German practice Noerr are representing KWL.

‘The current fashion’

If global investigations work is core to US firms’ game plan, as coveted is the international arbitration market, with a wider camp joining early movers like Skadden, Cleary Gottlieb and Shearman & Sterling in forging muscular practices in Europe.

The sector has been underwritten by the ongoing boom in international arbitration – most lucratively in the energy arbitration field but also in telecoms, construction and maritime. As important has been arbitration’s growing popularity as a means of resolving disputes from emerging markets, where multinationals will be wary of being drawn before national courts.

What is clear is that, despite mounting criticism of cost and creeping ‘judicialisation’ of arbitration, in a multi-polar world increasingly driven by the transnational hunt for energy and nature resources, there is no sign of the arbitration boom slowing.

Quinn Emanuel has been aiming to diversify its practice away from financial disputes, not only launching an arbitration team in 2012 with the A&O pair but also making senior hires in Paris and Hamburg. Other US players to expand their practices in London include Covington and Dechert.

It is striking the extent to which international arbitration has become rapidly colonised by US players in the London market over the last five years, with Skadden, WilmerHale, Debevoise, White & Case and Covington looking increasingly potent competitors in the City.

This rapid progress is logical. With arbitration focused around half a dozen global hubs, there is less need for domestic experience of local courts. Likewise, as a practice area focused on a small number of experienced heavyweights, there is far less need for the huge support and infrastructure in high-end commercial litigation or transactional areas, making it an ideal hunting ground for US firms. And, of course, given the global reputation of Paris and Stockholm as arbitration hubs, it is one area in which City firms cannot count on the overwhelming dominance of London – and home-field advantage – to give them an edge.

With high-end commercial arbitration dominated by less than 100 highly sought after individuals globally – US firms’ rainmaker-friendly model comes to the fore. Ominously for UK rivals, Europe’s top arbitration player, Freshfields, has just seen the departure of two of its top names – London arbitration group head Constantine Partasides and Paris-based Georgios Petrochilos – to form a new super boutique called Three Crowns.

Though the new venture has since attracted partners from Covington and Jones Day, the move underlines the challenge City firms face retaining litigators in a market in which top individuals are increasingly drawn to US firms or boutiques.

Boies Schiller partner Harrison dubs international arbitration the ‘current fashion’, while Covington’s Holland argues the rush to economically develop Africa will further drive the market: ‘Oil and gas is often found in countries that have big political problems, such as Nigeria. Oil and gas disputes give rise to international problems which need international firms that can solve the problem no matter where the investment is.’

In comparison to the intense focus on investigations and arbitration, US firms have been understandably wary of being drawn into a wider push into mainstream commercial litigation, reflecting the resources and domestic experience required. Even intellectual property (IP) litigation – which despite cost pressure for run-of-the-mill work is lucrative at the high-end – has been largely ignored by US firms focused on greener pastures.

Despite this, many teams argue their work stream is equally split between the three areas and US-bred advisers have secured roles on a string of headline disputes in recent years. Notable cases involved Quinn Emanuel, which represented Russian entrepreneur Oleg Deripaska in ongoing High Court litigation against Dechert client Michael Cherney, who alleged he was entitled to a stake in Deripaska’s shareholding in Rusal, the world’s largest aluminium company.

Additionally, in July 2013, a high-profile Court of Appeal decision saw Weil, Gotshal & Manges and Quinn Emanuel see off a challenge against the Barclay brothers and their associated companies over the ownership of three iconic London hotels (see box, ‘US firms in London’).

Yankees and boutiques to victory?

So does – as an increasing number of litigators contend – the future of London disputes rest with US law firms and boutiques?

As ever the path to victory rarely runs smoothly. It is telling that the standard-bearer Quinn Emanuel went through growing pains in 2013. Having achieved unprecedented growth until 2012, its London revenues fell 28% to £19.8m, even as firm-wide turnover increased by 14% to take the Los Angeles-bred firm within shouting distance of becoming the world’s first $1bn disputes shop.

It is also noteworthy that Bingham McCutchen, another early mover into the UK disputes market with a specific spin on contentious restructuring work, has had a tough 2013, with City revenues falling 4.4%, as an ocean of liquidity hit its core market.

With a number of major cases finishing in 2012, Quinn Emanuel has been striving to wean its practice away from its initial heavy focus on financial disputes, with its investments in arbitration and the hire of Greeno bringing a big name with impeccable commercial litigation credentials. An attempt to move into IP has yet to yield results.

The firm recently represented victims injured in a mining incident in Africa, as well as advising on general contract and shareholder claims, breaches of warranty and energy claims. ‘We are diversifying. Suing banks is still a strong part of our practice but we are doing more commercial cases,’ says Greeno.

Critics of the firm’s style argue that in London it has to be more careful to cultivate the referrals that have long been part of its model and must acknowledge that it no longer has the ‘killer app’ of its 2008 incarnation given that so many other dispute specialists have since launched or expanded in the UK.

Cleary Gottlieb’s Kelly puts it: ‘Quinn’s initial promotional strategy was very strongly focused on being “the only ones in the market”, but that’s no longer the case. We now have a whole range of litigation conflict firms such as Enyo Law, PCB Litigation, Stewarts Law and others.’

It will be interesting to see if the rise of a series of contentious boutiques in recent years will ultimately start to be as troublesome for US firms in London as it has been for City players.

Covington’s Holland sees a limit to this particular development: ‘This runs against the trend I see, where clients appear to want to work with a few trusted advisers regardless of what their problems are.’

‘The traditional English firms will continue to hold a strong market position generally, because of their long standing transactional relationships with those companies that operate most extensively in England,’ says Michael Kim, co-founder of Kobre & Kim. ‘However, in the specialised disputes market (for example, those involving significant conflicts of interest, or those involving foreign litigants seeking a boutique with an alternative fee arrangement), the growing number of high-quality specialist litigation firms in London will increase their market share.’

By any yardstick, foreign advisers have come a huge distance in a short space of time in litigation and so far profitably judged on financial results and the quality of work that has been secured. Interestingly, recent research by legal consultancy Motive Legal concluded that senior litigation recruits appear to have a far superior track record compared to transactional hires in terms of retention – which can be viewed as a proxy for successful performance.

It is interesting that while the inroads into the UK private equity and funds market by American advisers have been well documented, there has been little comment on the comparable phenomena in Europe’s contentious arena, a far larger market and one that involves matters going straight to the top of plc boards.

This is dangerous ground to lose and the erosion of City firms’ positions looks likely to continue for the foreseeable future. The question is how far it runs and whether it can be stopped before this particular high-stakes game is effectively over. On current form, it is hard to argue with the conclusion offered by Holland: ‘UK firms are suffering from declining market share. US-headquartered firms are on the rise, aggressively seizing work and UK advisers often end up with only what is left.’ LB

jaishree.kalia@legalease.co.uk